Category: Mortgage

Monthly Mortgage Payment

Post author By Josh Schulman
Post date August 17, 2023

What is included in a total monthly mortgage payment?

When you rent a home or apartment, you probably don’t think twice about where your monthly payment goes. You give your landlord a check, they cash it, and everyone sleeps soundly.

But since you’re about to experience homeownership, you need to change the way you think about your housing costs. That’s because when you have a real estate mortgage, your monthly payment doesn’t just go to a lender; it goes to several different parties. If you want to stay on top of your finances and keep costs down, you need to understand where each penny flows.

Pour a cup of coffee, sit back, and let’s demystify what a total monthly mortgage payment includes.

What is a down payment?

When you buy a house, you typically have to make a down payment — or initial lump sum offering — towards the purchase price of your property.

For example, suppose a property costs $350,000, and the lender requires a 20% down payment to avoid private mortgage insurance. In this scenario, you would need to come up with $70,000 upfront to secure financing.

There are other expenses in the homebuying process, like closing costs, agent commissions, inspections, appraisals, and insurance. These additional costs can vary based on the location and property type, so it’s advisable to consult with a real estate professional or lender to get a more accurate estimate of how much you might be on the hook for.

While the initial payment may seem significant, remember that the buying process is a financial test. Homes can be expensive to maintain and unexpected costs may — and, let’s face it, almost certainly will — arise over time.

Just wait until your kids break windows, appliances stop working, or your basement floods. The more you can save now, the better off you’ll be when an emergency happens.

What is a mortgage?

Unless you’re paying off the entire home price in cash, you’ll cover the remaining property cost by securing a mortgage or home loan. To continue our example, after putting down 20% on a property worth $350,000, you would need a $280,000 mortgage to cover the rest of the home’s value.

Homeowners often pay mortgages in monthly installments lasting anywhere from 15 to 30 years or longer. This allows you to spread the loan balance over a long period of time.

Monthly mortgage payment: A breakdown

A monthly mortgage payment contains several different components. Every month, you can expect your total monthly payment to flow to each of the following items.

Principal

The principal amount balance refers to the money that applies to reducing the original loan balance. If you borrow $280,000, that’s the number you’ll be whittling away each month after taxes and interest are accounted for. Generally speaking, fixed-year mortgages are frontloaded with interest, so your monthly checks only take small bites out of the principal at first.

Interest

Interest is the cost of borrowing money from the lender. Mortgage providers calculate interest as a percentage of the remaining loan principal. Interest typically accounts for the bulk majority of mortgage payments. The total amount of interest you’ll pay primarily depends on the rates set by the Federal Reserve at the time you apply for a mortgage. They are also influenced by whether you have a fixed-rate mortgage or an adjustable home mortgage.

In a fixed interest rate mortgage, interest is constant throughout the life of the loan. In other words, it doesn’t fluctuate with changes in market interest rates or economic conditions. If you bought a house at 3.5% interest using a fixed 30-year loan, your interest rate won’t change over those three decades (unless you choose to refinance to get a lower interest rate).
An adjustable-rate mortgage (ARM) changes over time depending on market conditions. Commonly, homebuyers start with an initial fixed interest rate for a few years, and then the mortgage rates reset depending on what the market is currently charging. ARMs can be risky because you never know when you’ll end up with a higher rate after the loan recalibrates. However, if you’re only planning to stay somewhere for a few years, this could be a more affordable short-term option.

Private mortgage insurance

Private mortgage insurance (PMI) is a type of insurance that protects lenders when the borrower defaults on their mortgage loan and forecloses.

Lenders typically require homebuyers to purchase PMI when they put less than 20% down on a property. While it’s always advisable to put down at least 20%, you can afford a property by putting down as little as 3.5% by securing a loan from the Federal Housing Authority, also known as an FHA loan.

PMI is usually temporary and automatically cancels once the borrower’s loan-to-value (LTV) ratio reaches 78%. Borrowers can also request a cancellation or wait until the midpoint of the loan term for automatic termination under the Homeowners Protection Act (HPA).

Do mortgage payments cover homeowners association fees?

Mortgage payments do not cover homeowners association fees, or HOA fees, because HOAs are separate entities from lenders, and funds given to them are put toward improving the community. If you end up living in a property governed by an HOA, you need to pay them separately to cover services and amenities (e.g., pools, fitness centers, and common areas).

Do mortgage fees include property taxes and insurance payments?

Mortgage payments do not always include homeowners insurance premiums and property taxes. However, it’s common for mortgage lenders to include them as part of the monthly payment. The corresponding acronym for payments that cover all of these is principal, interest, taxes, and insurance (PITI).

Sometimes, a lender might make a homeowner pay for the first year of insurance at closing. After that, the homeowner is responsible for paying the insurance company directly. Generally speaking, the decision to include insurance and tax bills in mortgage payments depends on the type of home loan (escrow or non-escrow) and the borrower’s financial situation.

Escrow account

Lenders often require borrowers to have an escrow account. These accounts hold a portion of the monthly mortgage payment, which the lender manages and uses to pay property taxes and, in some cases, the homeowner’s insurance policy.

An escrow account helps the homeowner stay current on their monthly obligations and simplifies budgeting for the borrower. The downside is that the homeowner usually has to maintain an escrow balance.

Non-escrow account

A non-escrow — or non-impound — account is one where the lender allows borrowers to manage their own taxes and insurance independently. In other words, the borrower becomes responsible for paying property taxes and insurance to their local government and insurance company.

Sometimes borrowers can ask their lenders to switch to a non-escrow account and take full responsibility for their taxes and insurance. For this type of request, the lender may ask for documentation to assess eligibility and financial responsibility. In the event your escrow account has a shortage due to increased taxes or insurance costs, you may first need to pay off the deficiency before the lender agrees to make the switch.

What is amortization?

Amortization is the process of paying off a loan over a specific term through regular installments. The two most common examples of amortization include home and auto loans.

With an amortizing loan, each payment amount covers a portion of the loan’s principal and a portion of the mortgage interest payments for the remaining balance. Any time you have an amortizing loan, the goal is to fully pay it off by the end of its term. Better yet, if you want to reduce your interest expenses, you might even want to pay it off sooner than that.

Best practices for monthly mortgage payments

Having a mortgage is nothing to lose sleep over. In fact, you could potentially wind up with a mortgage that is comparable to or even lower than what you’re currently paying in rent — especially if you put in a sizable down payment and choose a property in a favorable housing market.

What’s more, you’ll essentially pay yourself a portion of each monthly installment by building equity — or ownership — instead of forking over payments to a landlord. As time passes, your principal will drop, and your ownership equity will increase. In other words, you’ll own more of your house!

As you begin getting ready to make mortgage payments for the foreseeable future, keep these tips in mind to streamline the process and avoid complications.

Always pay on time

Always make your payments on time, before the due date. Late payments can result in late fees and penalties. They can also negatively impact your credit score.

Create a budget

Currently, 61% of Americans live paycheck to paycheck, even with inflation cooling. If you fall into this camp, be extra careful if you’re aiming to carry an expensive mortgage.

By creating a budget and sticking to it, you can ensure there’s enough money left over at the end of the month to make your mortgage payment. You may be unable to eat, put gas in your car, or buy basic household items — but at least you’ll have a roof over your head!

Make extra principal payments

Consider making extra payments toward your principal balance every month. This can help pay down your mortgage faster and reduce your interest costs over the life of the loan. If you take this approach, be sure to check with your lender about potential prepayment penalties.

Review your mortgage statements

Each month, review your mortgage statements to ensure they are correct and there are no errors or discrepancies. This is especially important any time you switch lenders during a loan.

Be careful about refinancing

At some point, you may consider refinancing your mortgage to lower your monthly payments. This might be a good idea for someone who buys a home when interest rates are high and then decides to refinance when they fall back down to earth. However, excessive refinancing could result in higher costs over time when factoring in loan term extensions and closing costs.

Try these mortgage calculators

Before you start aggressively looking for homes, it helps to understand what you can afford. Start by using a free mortgage calculator to estimate your potential payments.

Here’s how they work: A mortgage calculator asks you to input specific details about your home purchase and then generates an approximate monthly payment. For example, it may ask for items like your loan amount, interest rate, loan term, down payment, property taxes, and insurance costs.

Looking to get a better idea as to how much you can afford? Try free mortgage calculators from sites like Bankrate, Zillow, and Calculator.net.

Thinking about a mortgage? Explore our pre-approval checklist

Now that you know what makes up a mortgage bill, you can move on to the next step of the homebuying process: preparing for mortgage pre-approval.

This is an initial step for first-time homebuyers where a lender reviews your financial information to determine how big of a mortgage you can afford.

To learn more about how you can get a head start on buying your new home, check out our ultimate mortgage pre-approval checklist.

Disclaimer:

The content provided on this website is offered for educational purposes only. While we endeavor to provide accurate and up-to-date information, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the content for any purpose. Visitors are advised to consult with qualified experts before making any financial decisions or taking any actions based on the information provided on this website.

1st Time Homebuyer Mortgage

Mortgage Pre-Approval Checklist

Post author By Josh Schulman
Post date November 23, 2022

It’s an exciting time! You’re ready to begin the home-buying process by going house hunting and purchasing your dream home.

Before you start packing boxes, however, you need to get your financial affairs in order.

The first step in preparing to buy a home is getting mortgage pre-approval. To decide if you qualify for a home loan, lenders assess your credit history to determine your ability to make monthly payments and maintain a favorable financial situation.

To make the assessments needed for mortgage prequalification, lenders require documentation to verify income, assets, and expenses.

A checklist of documents to get started

As you begin the quest for a mortgage preapproval letter, you’ll have to turn over a bunch of documents containing financial information. Depending on the loan type and loan amount you’re pursuing, the required documentation can vary slightly.

Below is a checklist of the five most common documents you’ll need to prepare when you submit for your mortgage pre-approval.

1. Personal identification

To obtain a preapproval letter, you must provide a valid form of ID to prove your identity. State-issued driver’s licenses, passports, and US. alien registration cards are all acceptable forms of identification. You’ll also have to give the lender your contact information.

2. Social Security card

This is an added layer of identity verification. The lender can match your Social Security number with your personal identification to verify that they’re lending to the right person. Additionally, mortgage lenders will use your Social Security number to run a credit check.

3. Proof of employment

Borrowers will also have to show lenders evidence that they can afford monthly mortgage payments. As such, lenders will need proof of current, full-time employment.

When you’re applying for a mortgage, you’ll need to provide pay stubs that verify your monthly income. Additionally, lenders will require your tax returns (usually the two most recent W-2 forms) to confirm your long-term employment, further verify income, and assess other financial information.

If you’re self-employed, you’ll be asked to provide tax documents and business returns for the past three years. Additionally, the lender will request a year-to-date audited profit and loss statement. Whether it’s fair or not, self-employed individuals may have a harder time securing loans than their counterparts who work full-time for someone else — particularly if they’re first-time homebuyers.

4. Bank statements

Borrowers also need to show credit union and bank statements for the most recent two to three months to verify their ability to afford the down payment and closing costs (e.g., origination fees and underwriting expenses and, for home sellers, real estate agent commissions).

Additionally, lenders review bank account statements to confirm income deposits and uncover potential red flags. Large deposits from unknown sources, bounced checks, or evidence of insufficient funds can negatively impact your approval.

5. Investments

Investment accounts can help lenders recognize assets and other potential sources of income. that being the case, it’s a good idea to disclose additional financial information via investment account statements from your 401(k), 403(b), IRAs, stocks, bonds, and mutual funds.

Permission to pull your credit report

After you provide the required financial documents and other information, lenders will ask for permission to pull your credit report from one of the main credit bureaus before your mortgage application can move forward.

The credit report shows your payment history, the diversity of credit you have established (e.g., credit cards, mortgages, and car loans), and credit utilization. Essentially, it’s a way to gauge whether you are a serious buyer and are in the home-buying journey for the long haul.

Generally, your credit report will reveal a good credit score if you make on-time payments, consistently pay off debt, maintain a low credit utilization rate, and refrain from opening too many new lines of credit, due to hard inquiries.

On the flip side, if you’ve filed for bankruptcy, have delinquent accounts, and consistently use most of your available credit (e.g., maintaining high credit card balances), your credit score will be adversely impacted, which could reduce your mortgage options by making it harder to qualify for loan programs.

A good credit score of 670 or above will improve your chances of getting a loan with a decent interest rate. However, some lenders offer conventional loans to borrowers who have credit scores of at least 620. What’s more, some FHA loans can be offered to borrowers with credit scores as low as 500.

If your personal finance situation is less than ideal, you may still be eligible for a loan. Shop around to consider which lender and loan type is best for your needs.

Monthly expenses list

Part of the loan application process is to assess if you can take on more monthly debt. Loan officers want to know what fixed expenses borrowers are already responsible for each month, which helps them determine how much house they can afford and what purchase price is reasonable for their budget.

While your credit report will likely show the list of your fixed expenses, the lender may also ask you for more details. Fixed expenses are considered regular, recurring payments. Common expenses include:

Current rent or mortgage
Car loans
Student loans
Credit cards
Medical bills

You do not need to disclose a list of variable expenses, such as gas or groceries. The fixed list of debts is more substantial for the lender to assess, as these expenses require a monthly minimum payment that you will always be responsible for making. Recognizing these fixed debts helps a lender determine your debt-to-income (DTI) ratio, which helps them come up with a better loan estimate for what you can afford.

Debt-to-income ratio

Assessing your debt-to-income ratio helps lenders determine if you can take on more debt in the time frame you’re hoping to make a home purchase. This ratio shows how much money you have going out versus what you have coming in.

To qualify for a loan, you cannot exceed the maximum debt-to-income ratio, which varies depending on the type of loan you’re applying for. It’s wise to ask your lender about their debt-to-income ratio requirements because if you exceed the maximum, you may find out the hard way that your dream home is out of your price range.

Supplemental documentation

In addition to the standard documentation that most applicants must submit, depending on your unique circumstances, you may be asked to provide supplemental documentation. In this section, we’ll highlight some of the other documents you may be asked to produce to determine your loan eligibility.

Homeowner documentation

If you already own a home, you’ll likely be asked for recent mortgage statements to assess the equity in your home, principal balance, and current monthly payment. If you’re selling your home, this information can help lenders assess how much you should qualify for moving forward.

If you are keeping your home and applying for a new home mortgage to refinance, your current homeownership will be considered part of your debt-to-income ratio.

Rental information

Lenders want to know if you can make your monthly mortgage payment on time. One way to assess this is to consider your rent history. As such, you may be asked to provide the names and contact details of former landlords. That way, lenders can verify whether you have consistently paid rent on time.

Gift letters

If a loved one provides a gift to help you cover the cost of your down payment, your lender will require a gift letter to prove this money is not a personal loan. (Remember, a personal loan would alter your debt-to-income ratio.)

If you’re receiving a gift, check with your lender about the rules regarding who can provide gift funds.

Preparing for a smooth pre-approval process

Getting a mortgage is your gateway to owning your own home!

Now that you know what a lender will expect, you’ll be prepared to manage the pre-approval process efficiently. By understanding what a lender will request, you’ll have a better idea about what mortgage rates you can afford, and you’ll be better prepared to prove that you’re a good candidate for a mortgage loan.

Keep in mind that this process is anything but a short one. You’ll have to wait several business days for your application to be processed. Still, you’ll want to move quickly once you get preapproved, because your mortgage preapproval letter will likely have an expiration date.

At this point, you know the ins and outs of the mortgage preapproval process. So what are you waiting for? Get the ball rolling and get that much closer to landing the home of your dreams.

Good luck!

Disclaimer:

1st Time Homebuyer Mortgage

Different Types of Mortgage Loans

Post author By Josh Schulman
Post date November 23, 2022

Many home buyers are so excited and eager to jump into their journey to homeownership that they don’t educate themselves on the many different types of mortgage loans that lenders offer.

Are you one of them?

If so, it’s time to rethink your approach. One of the most important steps to doing that is to learn about the different mortgage loans available to aspiring homeowners. After all, some types of home loans may work well for other homebuyers but they may not be right for you.

In this post, we provide some key information about the loan options available for both first-time homebuyers and seasoned pros. Keep reading to learn more about which one is best for you.

Types of mortgage loans for all homebuyers

There are several types of mortgage loans that fit the needs of different homebuyers, whether you’re a military veteran who’s lived in several homes or a first-time homebuyer.

Down payments, mortgage terms, interest rates, closing costs, and eligibility requirements vary by the type of loan, as well as the loan amount.

Conventional mortgage loans

As the name suggests, a conventional mortgage is the most common type of real estate mortgage. Like all other loans, these loans have eligibility requirements. For example, qualifying typically involves a need for a higher credit score (minimum of 620) and a lower debt-to-income (DTI) ratio.

With a conventional mortgage loan, you can buy a home with as little as 3% down upfront as long as it’s going to be your primary residence. But if you have a down payment of at least 20%, the mortgage lender won’t require you to buy private mortgage insurance (PMI). And that’s a pretty big deal because a mortgage insurance premium can really put a strain on your cash flow.

Mortgage insurance rates are usually lower for conventional loans compared to other loan types like Federal Housing Administration (FHA) loans. If you’re a borrower who wants to take advantage of lower interest rates with a larger down payment, then a conventional loan is a great choice.

30-year fixed-rate mortgages

One of the most common mortgage options for single-family homes is a 30-year fixed-rate mortgage, which has an interest rate that doesn’t change throughout the life of the loan. If payments are made on schedule, the loan will be completely paid off once the 30-year term is over.

This loan is best for home buyers who want a lower monthly payment since the loan will be stretched out over a longer period of time than, e.g., a 15-year fixed-rate mortgage. At the same time, borrowers have the flexibility to pay off the loan faster by paying more than the minimum amount.

Who knows? If you win the lottery, you might be able to pay of your loan in one lump sum!

15-year fixed-rate mortgages

Want to pay off your home faster? Do you want a mortgage loan program that allows you to refinance your home for up to 97% of its value?

If those options are appealing, consider a 15-year fixed-rate mortgage loan. A 15-year fixed-rate mortgage is similar to a 30-year fixed-rate mortgage, except that the interest rate stays the same over a 15-year term, instead of 30 years.

Of course, this route means you’ll have higher monthly payments. But by paying off your mortgage sooner, you’ll be able to save money in interest payments.

Adjustable-rate mortgages

An adjustable-rate mortgage is the opposite of a fixed-rate mortgage. It’s a home loan in which the initial interest rate is set below the market rate on a comparable fixed-rate loan. Then, as time goes on, the rate rises.

At first, borrowers can benefit from a lower interest rate as well as lower monthly payments. If you don’t plan on having the mortgage for long, then this may be a good option for you. You might also consider an adjustable-rate mortgage if you believe interest rates will be lower in the future.

FHA mortgage loans

If you’re looking to finance a home purchase, the federal government may be able to help. The government offers several mortgage options, including FHA loans.

FHA loans are government-backed mortgages geared towards borrowers with low to moderate incomes, who are often purchasing a home for the first time. With an FHA mortgage loan, buyers can often put down as little as 3.5% of the home’s purchase price.

These loans also have lower credit score requirements. Believe it or not, you may be able to qualify with a minimum FICO score as low as 500.

VA mortgage loans

A VA loan is a type of government loan backed by The U.S. Department of Veterans Affairs. This financial vehicle is designed for veterans, service members, and their surviving spouses.

They can purchase homes with a low down payment, or even no down payment, as well as no PMI. Thanks to their service to the country, these borrowers can also benefit from more competitive interest rates, which can make it easier to afford higher home prices.

USDA mortgage loans

A USDA home loan is a zero-down payment mortgage for eligible rural home buyers. Backed or issued by the U.S. Department of Agriculture, USDA loans typically don’t require a down payment.

So, if you’re considering buying a home in a rural area and aren’t keen on putting any money down, then a USDA mortgage may be a viable option. You can also use USDA funds to build, repair, renovate, or relocate a home.

Jumbo mortgages

Are you thinking about financing a home that’s too expensive for a conventional conforming loan? If so, you might consider a jumbo mortgage loan. In most counties, the maximum amount for a conforming loan limit is $647,200. So, if you’re looking to buy an expensive home in an expensive state like New York or California and the price tag exceeds this amount, you may be able to get a jumbo loan.

Because they’re larger loans, jumbo mortgages typically require a credit score of 700 or higher. You might also need a down payment of 10% or more. For these reasons, you should absolutely apply for pre-approval before beginning the house-hunting process.

Interest-only mortgages

An interest-only mortgage is a type of mortgage that requires the borrower to pay only the interest on the loan for a certain period.

This makes your monthly mortgage payments lower when you first start making payments. However, you’re not building up any home equity during this time. And, once your interest-only period ends, you’ll start paying the interest and principal. Also, the amount of time you have for repaying the principal is shorter than your overall loan term.

This type of mortgage may be ideal for you if have ample assets, good credit, and a short-term ownership outlook. You can also pay down the principal balance if you receive large annual bonuses.

Reverse mortgages

If you’re thinking about refinancing or are looking for extra cash, you can also consider a reverse mortgage. Essentially, these vehicles are geared toward older homeowners who are looking for cash. Each month, a lender sends the homeowner a check, and those funds essentially turn into an interest-bearing loan.

Unless you are interested in giving up equity in your home, you probably should avoid this financial instrument.

Purchasing a home with a more informed outlook

Now that you know about the different types of mortgage loans, you can make a more informed decision when choosing a mortgage. And that’s a great thing. When you go into purchasing a home without knowing your options, you could be stuck in a situation that isn’t ideal for you and your family.

For most folks, buying a home is usually a massive long-term financial commitment. That being the case, it’s best to embark on your journey with as much knowledge and insight as possible.

Good luck finding the perfect loan and ending up in the home of your dreams!

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